Wednesday, May 30, 2012

Dell announced today that it is experimenting with ARM processor based servers and shipping product to partners. The "Copper" servers will be used mainly for evaluation. ARM processors currently are limited to 32-bit paths, but almost all current servers run 64-bit software. ARM is planning to introduce a 64-bit CPU architecture, probably some time in 2013. Dell presumably would start selling commercial quantities of the ARM based servers in 2014.

ARM licenses its architecture to many semiconductor companies. What ARM processor did Dell choose for its preliminary designs? ARMADA XP by Marvell.

It is probably no reason to buy or sell Marvell stock. ARMADA is getting a lot of traction, but you can bet other ARM processor makers like Texas Instruments will be gunning for the slot in the commercial run. Dell could even abandon the project if customers decide that ARM really is not all that great at running web workloads when compared to x86 based processors.

Still, it puts Marvell on the inside track to what may the next big wave in computer processing.

Tuesday, May 22, 2012

Marvell Technology Group (MRVL) reported results above expectations for the quarter ending April 28 (Q1 fiscal 2013) last Thursday. I was delighted that CEO Sehat Sutardja strayed from his usual dry, careful observations to take on some negative Street views of his company.

Revenue was $795.4 million, up 7% sequentially from $742.7 million, but down 1% from $802.4 million year-earlier. That may not seem stellar, but some rival semiconductor companies and some analysts had been predicting considerably worse. Essentially the rumors were that a competitor was finally besting Marvell in the hard drive controller market and that Marvell was also failing in the Chinese smartphone market.

Marvell stock ended Thursday, before results were released, at $13.3. Today it closed at $12.99, for a market capitalization of $7.4 billion. Clearly the news that Marvell is back on the success track has not yet sunk in, with overall market turmoil probably not helping.

For investors the last few year with Marvell have been tough. After splitting in 2004 and again in 2006, the stock price entered 2007 at well over $20 per share. At the 2008 bottom it hit a low around $4.48. More recently Marvell's 52-week high was $16.86, low was $11.23.

The real long-term value in any technology company is as much in what is going on in its R&D department today as what last-quarter's results were. R&D spend in the latest quarter was a healthy $256 million. Marvell does not give a breakdown of R&D spend, but a lot of it had to go to two crucial areas where Marvell leads competitors: TD smartphones for the Chinese market and next generation storage devices, including both HDD (hard disk) and SDD (flash memory based).

The main good news for Q1 was the continued rapid ramping of sales of Marvell-processor based TD-SCDMA smartphones in China. Marvell's chips not only include the processor, but most of the functions needed to run a smartphone (graphics, cellular modem, wi-fi, bluetooth). The middle-class masses are buying Android based smartphones that run on a this new 3G high-speed, invented-in-China protocol. Revenue from these chips was up 25% from Q4. Usually, for its mobile sector, Marvell sees a seasonal decline from Q4 to Q1, and indeed overall the sector was down 1% sequentially. Even then Marvell's mobile segment revenue was up 14% from year-earlier Q1.

Marvell has not competed very successfully for silicon in smartphones in the U.S. or Europe. It has space in some RIM Blackberry phones. When RIM tanked analysts predicted Marvell would have to abandon the space. Instead Marvell is turning its clear victory in China to its advantage in the global competition for the next generation of smartphones. Qualcomm's control of CDMA patents may be history as LTE becomes the new standard. I don't see Marvell beating out Qualcomm in the U.S. or Europe in the next few years, but its design philosophy is enabling it to turn the flank in China, much of Asia, and Africa.

In the hard drive space Sutardja specifically took on the claims of its chief competitor (LSI) about capturing market share, claims that have been echoed by several Wall Street analysts without fact checking. Marvell's storage sector revenue was up over 20% sequentially, in what is usually a seasonally sequentially down quarter. This sequential growth was only partly due to industry recovery from the Thailand floods.

After the floods Marvell's market share did drop to 56%, according to Sutardja. But that was based on which HDD makers were hurt worst by the flooding, not by the competitiveness of Marvell's controller chip rival. In Q2 quarter Marvell's market share should return to about 60%. The disruption of the industry in 2011 meant people produced whatever capacity drives they could. This quarter will see return to normalcy, which means favoring higher-capacity drives for any units that can be produced. Marvell leads in controller chips for high-capacity drives, including the new 500 GB/platter mobile drive solution, which is expected to ramp revenue another 50% in the current quarter. Sutardja also pledged to gain unit and revenue share going forward based on next-generation designs.

There are a lot of other pieces to the Marvell enterprise, but a good summary would be the guidance issued for fiscal Q2 2013 end July, 2012: 6 to 12% sequential revenue increase, or $840 to $890 million. A bit above the upper end of the range would put Marvell flat y/y.

While revenue has flattened since 2010, profit generation has been very healthy at these levels. As a result Marvell initiated a $0.06 per share per quarter dividend. $500 million was added to the share repurchase program. The cash balance was $2.2 billion.

Marvell would be able to buy back a substantial portion of its shares at its current share price.

The usual risks apply. Marvell faces competition in every market it serves, in particular chips for smartphones. My best guess, however, is that over the long run Marvell will continue to do what it did after its founding: take market share from rivals. It will also continue its expansion into new sectors.

Disclaimer: I am long Marvell. I seldom trade the stock and won't for a week after this article is published.

Monday, May 21, 2012

Just to note to readers that I have taken a small position in Inovio (INO), www.inovio.com.

Inovio is a biotechnology company developing a number of vaccine therapies using new techniques. It has a very small market capitalization and is very speculative, more suitable to venture capital than to ordinary investors. Despite that I think that its technology platform has a number of shots on goal coming up (data points for Phase I and II trials in 2012 and 2013). I would say don't buy Inovio unless you are good at managing risk.

I am buying because the very preliminary results are that the technology does work. If it really works, in large, double-blind, Phase III trials, it should be very valuable. Inovio would most likely partner with a larger pharmaceutical company rather than taking any commercial product to market itself.

Buying Inovio this early will force me to keep a closer eye on developments. However, for most investors, if Inovio is successful it is probably more of a 2015 story. Any negative trial results in the meantime could send the stock lower.

Thursday, May 10, 2012

Dot Hill (HILL) is up today after reporting considerably better than expected Q1 revenues. Despite that, with expected revenues of over $200 million in 2012, its market capitalization is around $74 million. Is Dot Hill an overlooked prize, or is the market right about its value?

Dot hill manufactures data storage arrays for the low-end of the enterprise market, selling to OEMs that typically rebrand the devices. A few years ago Sun was their main customer, but Sun dropped them, leading to a crisis. HP is now their main customer. Management has been building an impressive list of other customers, reducing reliance on HP.

Revenues were $54.7 million, up 16% sequentially from $47.0 million and up 11% from $49.2 million in the year-earlier quarter. Usually Q1 sees a seasonal revenue drop from Q4, so these are impressive numbers. Part of the revenue, I am guessing in the range of about $4 to $5 million, came from orders from a particular customer that provides storage solutions to the telecom market. Management mentioned this could happen when they gave Q1 guidance in March, but they clearly hedged a bit.

The year over year comparison was the first good one turned in since NetApp was dropped as a client in 2010. I believe the prior negative year/year comparisons had been depressing the stock price, despite the compelling reasons for ditching NetApp.

GAAP net income was negative $1.8 million, up sequentially from negative $6.6 million, but worse than the negative $1.3 million of the year-earlier quarter. EPS was negative $0.03, up sequentially from negative $0.12, but down a penny from negative $0.02 year-earlier.

Even if we look at non-GAAP numbers, which drop out non-cash accounting charges, while HILL got into the black it was just barely: net income was $1.9 million. EPS was $0.03.

Guidance is that Q2 will be off Q1, with revenues between $48 and $52 million and non-GAAP EPS close enough to zero that it could be a plus or minus.

That is the past, what about the future? Technology companies can't dwell in the past, as RIMM, among so many others, have demonstrated. During the crisis (losing Sun during the recession) management started making smart moves about the future of the storage market. They are competing against giants, but they sometimes cooperate with giants like HP. Their storage products have actually received quite a bit of acclaim in the industry.

Some of the Q1 revenue growth came from new clients signed in 2011. Hill was able to win these customers because they produce very reliable storage technology at a reasonable cost and work hard for their clients. Autodesk and Concurrent Computer were cited as OEMs signed in 2011 that are seeing sales ramps. Official announcements of newer customers should be coming out as 2012 progresses.

Dot Hill has mainly served the entry-level enterprise storage market. Part of their success has been from adding higher level features to entry-level designs. New storage arrays that have mid-level enterprise features should be released in the second half of the year. OEMs are already excited about them, but a significant revenue ramp of the new products is probably a q4 and 2013 story.

On the whole Dot Hill management was upbeat, particularly about the second half of 2012. With the ramping of lines at newer OEM customers, Dot Hill should be able to enter an era of sustained profitability. Given that the company is debt free and holds $41 million in cash, there is a lot of upside potential if management can execute according to plan. In terms of share prices, I would be delighted, but not overly surprised, to see shares in the $3 to $5 range by mid 2013. I am also surprised, given their patent portfolio, that Dot Hill has not been a takeover target. Of course the usual risks apply, but I think all the risk is priced in at current levels.

Disclaimer: I am long Dot Hill. I won't make HILL trades for 1 week after publishing this article. I do not have positions in any of the other companies mentioned.

Monday, May 7, 2012

Dendreon (DNDN) investors (and speculators) have become used to wild price swings. In the early years these depended on opinions about whether the FDA would give marketing approval for Provenge for prostate cancer. After FDA approval came, after years of delay, we had overly-optimistic forward-looking guidance on how fast Provenge sales would ramp from Dendreon management, and wildly optimistic forcasts by bullish analysts. Then Provenge, in 2011, ramped revenues, if not slowly, at least significantly slower than most investor's expectations.

All the while there were people and institutions with big shorts out there, certain that Provenge would not be approved by the FDA, then that it would not be reimbursed by insurance companies and Medicare, and finally, lately, that it would be rejected by physicians as a statistical con game. They were proved wrong on every count.

On the Q4 analyst call Dendreon management had guided to a Q1 with "modest" sequential revenue growth. (Excluding the $125.2 million one-time royalty revenue item in Q4.)

Almost strangely, that is the result that was turned in today. Revenue, almost exclusively from Provenge, was $82 million. Provenge revenue in Q4 was $77 million, giving sequential growth of 6.5%. Enough to sour the collapsing-Provenge-sales shorts, if not enough to warm up the bulls. Year over year results were much more impressive, about triple the $27.0 million of Q1 2011.

Progress can be fairly described as steady. More doctors and patients are trying the therapy. More data supporting the therapy will be released this quarter. March was a particularly strong month, but management does not want to extrapolate from that, instead seeing low-single-digit sequential growth in Q2 from Q1.

There are negatives, the main one being cash burn in the quarter of $59 million. There was $559 million cash left at the end of the quarter. While management is working on reducing costs, mainly they are expecting to reach profitability by expanding sales. The break-even point is expected around $500 million per year, or $125 million per quarter. At a low-single digit per quarter growth rate, that won't come soon.

On the upside is the possibility of European approval. Given the expense of Provenge therapy, and the state of European economics, even if approved there might be some negotiation over price. Still, Europe is a big market, and then there is the rest of the globe.

There are also possibilities for further immunotherapies for other cancer types, but those are not likely to come into play this year. Cancer trials take a long time.

When new biotechnology companies have promising therapies but no FDA approvals they often reach speculative heights that lead to disappointment during the revenue ramp phase. That certainly happened with Dendreon, which hit a share price of $54.06 on April 26, 2010. Its 52-week low this year is $6.46.

With the stock closing at $11.69 before results were announced, giving a market capitalization of just $1.8 billion (and sinking lower in after-hours trading), in my view Dendreon is a buy but carries considerable risk. Failure to gain approval in Europe, or continue to ramp sales up past the $125 million per quarter level, would tank this stock further. I expect European approval and hitting the break even mark in 2013, but that makes for a long wait. It is not exciting stuff anymore, but it is still a solid long-term bet.

Manage your risk, keep diversied!

Disclaimer: I am long Dendreon. I won't trim or expand my position for 1 week following the publication of this article.